Will I have to pay taxes on the sale of my home?

DanMoisand

Columnist

Q. Due to a transfer, I will be selling my home this year. My neighbor says that because I’ve only lived in it for four years, the new tax law says I’ll have to pay taxes on the sale. Is that capital gains or regular taxes?

Sam in Greenville, SC.

A. Sam, you probably won’t pay any income related taxes upon sale of your home. The final law made no changes to how primary residences are taxed upon sale.

There was a provision in the original offerings from Congress that would have provided favorable tax treatment only to taxpayers living full time in a home for five of the last eight years. Further, if you passed that five of the last eight years test, the available exemption from capital gains tax would phase out $1 for every $2 your adjusted gross income exceeded $250,000 ($500,000 if married).

Since the new law makes no changes, the rules that applied in 2017 will continue to apply going forward.

IRC Section 121 provides that gains on the sale of a personal residence (not rentals or vacation homes are taxable unless you have lived in the home for at least two of the last five years. If you meet that two-year requirement, the first $250,000 ($500,000 if married) in gains are tax free. As a result, most sellers of a personal residence do not pay any taxes upon sale.

If your gain is more than those amounts, the excess is taxed as capital gains. The rate that applies to capital gains depends on how the rest of your tax return looks. The rate could be as low as zero and as high as 23.8% of the taxable gain.

The gain on the sale of a primary residence is the difference between the net sales proceeds and your basis. Basis is generally what you originally paid for the home plus any improvements you made to the property. Routine maintenance is not an improvement for these purposes but updating a kitchen could be. Details are found in IRS Publication 523.

In anticipation of your sale, gather receipts for things you suspect may be acceptable as “improvements” and share them with your tax advisor.

If you have a question for Dan, please email him with “MarketWatch Q&A” on the subject line.

Dan Moisand’scomments are for informational purposes only and are not a substitute for personalized advice. Consult your advisor about what is best for you. Some questions are edited for brevity.

Dan
Moisand

Dan Moisand is a principal at Moisand Fitzgerald Tamayo, LLC in Melbourne and Orlando, Fla. He is a happily married father of two, a past national President of the Financial Planning Association, has been featured as one of America’s top financial planners by at least 10 financial planning publications.

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